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If you do not qualify for a loan modification, and foreclosure seems unavoidable, there are steps you can take to make the most of a bad situation. One of these options is arranging with your lender for a Deed in Lieu of Foreclosure.

What does this mean?

It means you hand over the deed, or ownership, of your house to the lender in exchange of clearing your debt. The homeowner loses his home but is left without a debt while the lender takes immediate control of the house.

What advantages does this option have?

In certain circumstances a Deed in Lieu of Foreclosure can have significant advantages for both the lender and the buyer.

1)     The lender can take immediate control over the property. A much more efficient method than foreclosure proceedings that can take years to finish.

2)     The borrower foregoes his home but is left without any debt.

3)     Lenders can save themselves a lot of money in court expenses, time and other complications if they avoid a typical repossession procedure.

4)     Borrowers that avoid a foreclosure will remove the stain on their record and in some cases avoid bankruptcy.

What are the requirements for a Deed in Lieu of Foreclosure to be carried out?

1) The market value of the home must be less than the current balance of the mortgage.

2) There must be no third party credits secured by the home, like a second mortgage or a secured car loan.

Although it might seem counterintuitive for a homeowner to let his home, probably his largest investment, go without anything to show for it, it can be a much better alternative than a long and painful foreclosure. Borrowers don’t have to see their credit score hurt and can start again elsewhere, while lenders can cut their losses and try to make the most of a bad loan without having to continue spending money and resources.

In what circumstances should a homeowner think about handing a Deed in Lieu of Foreclosure?

Obviously, homeowners that are going through financial difficulties and cannot afford their monthly mortgage payments. However if they still have some sort of income then they may well qualify for a home modification or some other option. This path is more suited for homeowners that either cannot afford any kind of loan modification or feel that their home is too underwater, worth less than the mortgage balance, to be worth saving.

How is it done?

Both parties must agree to sign an Agreement in Lieu of Foreclosure. This document transfers ownership to the lender. In some cases the homeowner might pay a certain amount of money to reduce the loan and make sure her credit score is not affected. Once the document is signed the lender will issue a waiver to deficiency judgment, which will be used if the sale of the house is below the value of the mortgage. After this an escrow service executes the agreement; releasing both the lender and the borrower from their mortgage contract.

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Loan Modifications are not providing the help American homeowners need. Of the millions of troubled borrowers only a small percentage qualify for a loan modification trial and most of the lucky ones get stranded in the way.

This article will provide you with a list of simple steps that will increase your chances of getting a permanent loan modification.

The number  one reason why loan modifications don’t work.

Before we get into the practicalities of how to find your way through the maze of loan modifications it is worth spending a few words on the top reason why loan modifications are not working: They Don’t Address the Real Problem.

The real problem is unemployment and the Credit Crisis.

The fastest growing demographic for loan modification are prime mortgages. These are good mortgages, bought by borrowers with high credit scores that can’t pay their mortgage because of the increasing rate in unemployment. Unemployed borrowers struggle to get a loan modification because you can only qualify if you can prove you have nine months of unemployment benefits lined up. Most unemployed borrowers are unlikely to fulfill this requirement.

The other big reason loan modifications might not work for you is that your mortgage might be the least of your credit problems, you might be overstretched on your car loan, credit card loan, and other personal loans. Many commentators feel the government is trying to deal with a Mortgage Crisis when what they should be dealing with is the broader Credit Crisis.

First Step. Get the Information You Need.

Visit the government’s official website at www.makinghomeaffordable.gov . There you can find:

1)      The current sponsored program the Government is touting.

2)      Useful forms to help you compile the information you need to supply to lenders.

3)      Find the closest government paid advisor that can provide you with personalized guidance.

Second Step. Decide what you can pay, and be realistic about it.

There is such a thing as a BAD LOAN MODIFICATION. After months of wasted time and resources some borrowers end up with a loan modification they still can’t pay.

You need to figure out what you can truly afford to pay on your mortgage every month. The government guideline is 31% of your monthly income but that might not work for you. Get some real figures together. How much do you spend on housing costs? What is your income, or average income if you’re self employed or work on commission. Put all this on paper, your lender will want a look at it.

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Debt consolidation and debt settlement adverts are all over the media lately. This is quite predictable when millions upon millions of Americans are behind in their payments and risking foreclosure on their mortgages besides being maxed out on their credit cards. Understanding what each debt management system will do for you and which is the right one for you is vital if you are in serious debt and are struggling to make payments.

Debt Consolidation.

You have no doubt seen many adverts promising to consolidate your debts into one large loan that will charge you a lower interest rate and cheaper monthly payments. These debt consolidation loans do exist and can work for you if you choose the right loan. Of course they can also be the biggest financial mistake you make.

Understanding how debt consolidation loans work is the key to making the right choice.
Debt consolidation generally works as a secondary or even a primary mortgage loan. A debt consolidation company will buy off your other debts and  put them together into a mortgage-like loan. This makes your interest rate drop as the loan is secured by your home. The bad news is that the security for the loan is your home. If you don’t make payments your loan is at risk. However if your debts are on your credit cards or car loan and you do not make payments your debtors cannot force you to sell your home. However if your lender provides you with a debt consolidation secured by your home you could be forced to sell to pay the loan.
Another risk related to debt consolidation loans is that they can be expensive and incur in high setup fees which increase the principal on your debt and the interest you pay throughout the lifetime of the loan.

Debt Settlement.

Debt settlement works on a different premise. You settle directly with your lender and doesn’t involve a third party that buys your debt, reducing expenses significantly.
In order to settle your loan you must contact the debt settlement department of your bank and explain that although you would love to pay your loan you currently cannot afford to do so. They will ask for a load of information on your income and expenses and see what modifications they can make on your loan.

Modifications can include reducing the principal amount of your loan, increase the length of your loan and even reduce the interest rate.
The problem with debt settlement is that it destroys your credit rating as you are basically telling your lender you can’t pay your debts and that you need their help. That is not going to make you very popular with lenders.

A soft form of debt settlement is being encouraged by the government through the loan modification program.  It is well worth contacting the H.U.D (Housing and Urban Development department) to see if you can qualify for mortgage aid.

Which is the right debt management for you? Doing your own research is the key to find out. Neither of these options are without its disadvantages which is why planning and research are vital.

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How can you get out of the cycle of debt and have a fresh start. Those looking for easy fix solutions will have to continue looking but those that are determined to work hard with their problem and are willing to make big changes in their lifestyle and habits can find a solution.
We must start by saying that some debt problems are too extreme to solve in any practical way and bankruptcy is the only real solution, but that is an extreme measure you should leave as the very last resort as it will destroy your credit rating and affect your ability to get a loan, a lease or even a job for years to come.

So what steps can you take to break the cycle of debt?
Maybe you started with some small time debts, maybe a small investment loan to start a business and it all went wrong, you then required another loan, or credit card to pay for your debts, or your monthly payments and now you can’t afford to pay the interest on your debt payments, throw in a car loan and a mortgage and you can quickly find yourself in a seemingly no way out situation.

The steps you must take are surprisingly simple, which makes some think they can’t possibly work, unfortunately they are also slow and require endurance and “stickability” to make them work.

Step 1.
Sit down and work out exactly how much you owe and the rate of interest you are paying on each loan.

Step 2.
Assess what your or your family’s income is and what you can afford to pay towards your loan payments. You should aim to pay as much as you can without completely strangling your family’s economy and leaving  you with some breathing room if interest rates rise.

Step 3.
This is the hard step, to change your lifestyle and habits to reduce your expenses to a complete minimum. You are in serious debt, this is not a game, you are under moral and legal obligation to do everything you can to pay your debts and that means going without  your precious luxuries and saving every buck you can. Where people often fail when trying to break the cycle of debt is by trying to reduce their debt without changing their lifestyle.

Often people in a cycle of debt are “addicted” to spending and living above their means, just like an alcoholic is addicted to the feeling alcohol provides, in both cases a complete lifestyle change is often required.

Step 3.

If you cannot find a way to pay for your current loan payments with your income you  are going to have to find a way to reduce your payments or increase your income. Increasing your income in the short term is often difficult, although sometimes one of the spouses does not work and can start doing so to pay towards the loan.
Another solution is to consolidate your loan in a large debt consolidation loan that will allow you to reduce your monthly expenses. Although this can be a good solution beware of the high fees and interest rates that can make the loan uneconomical.

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First of all we must start by saying the debt consolidation loans may not be a good idea for you. In fact many dubious loans are often “sold” as debt consolidation loans when they are just a bad loan you wouldn’t want to touch with a barge pole.
Debt consolidation loans are loans that are purchased to pay off loans. This is especially attractive for people who have a number of loans with different companies. For example a good candidate for a debt consolidation loan might have a few thousand dollars in credit cards, a car loan and a mortgage to pay. The credit card loans probably are set at a 16% interest rate, while the car loan will probably be a little lower at around 10%, with the mortgage at even less probably around 7% depending when the person got the mortgage and how good the deal was. Unless this person has an incredible wage he is probably in a bit of trouble as his monthly credit card debts, car loan and mortgage are eating up most of his income. A debt consolidation loan will pay for all his debts and allow his monthly payments and his interest rate to drop.

How do they work?

Debt consolidation loans often work by extending the length of the loan. If you owe a total of $90,000 to 3 different lenders it will pay all of them with a large loan and charge you the total as a single mortgage-like loan. When you are paying for credit cards the time you have to pay back differs from credit card to credit card, you might have to pay a minimum, or you might be suffering from the high interest rate that seems to be increasing your debt faster than you can pay it. Your car loan will be set at another rate of payment, as will your mortgage. Paying for various loans at the same time can make it impossible for a household to meet this payments, however if these loans are combined into one large loan, the payments can be reduced and made affordable for the borrower.
What is good about debt consolidation loans?
Debt consolidation loans can allow a household to take control of their monthly expenses and get to the end of the month without having to get further into debt. For some people it is the only real option besides either losing their home, their car or even declaring bankruptcty.

What are the cons of debt consolidation loans?
They can be expensive. Debt consolidation loan providers are not often charitable organizations if you get my drift. They are there for the profit and know that people will be willing to pay a lot of money to bring down their monthly payments to an affordable level. Debt consolidation loan lenders will often charge large fees for their services and provide sub premium (higher than normal) interest rates. By extending the loan borrowers will often automatically pay more interest because the tenure of the loan is longer even if the interest rates are lower.

They can cause you to lose your home. Debt consolidation loans are often designed to be linked to your home as security. If your loans were made up of credit card and car loans you might have been struggling to pay them but your house was never at risk. Credit card handlers cannot force you to sell your house to pay them. However if you get a debt consolidation loan with your home as a security and you cannot make the payments you could lose your home.

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Common pitfalls of debt consolidation you must avoid.

Getting into debt is not something we like to make a habit of. We are therefore not always prepared to deal with serious debt and more importantly how to get out it. Unfortunately there are many companies that make a business out of taking advantage of people in debt. There is nothing wrong about making a profit out of loans, nearly all of us have needed a loan at some time, however there are loans and loans, there is debt consolidation and there are downright mistakes out there you must avoid.

What makes things harder is that what is a mistake for one person is the ideal solution for others. That is why your first step in taking control of your debt is to understand your situation, then you can adapt debt consolidation to your personal circumstances. To illustrate this point think about two different people in debt. One has a student loan and is struggling to make the monthly payments, another has maxed credit cards, a car loan and a mortgage. For customer A a debt consolidation loan would probably be a bad idea, he is probably not going to get a better interest rate than that of his student loan, while for customer B a good debt consolidating loan might be just the answer to lower his monthly payments and interest rate.

So what are the main pitfalls of debt management?

Paying off credit card debt and then continue to pile up debt on it.
This is a common problem with people who fall in cycle of debt. It is generally due to bad spending habits and can be solved with some basic but vital counseling. The best advice is to never borrow for things you can save for unless it is a necessity. This can seem an extreme and even old fashioned attitude towards debt but it can often be the only long term solution for people trapped in cycle of debt.

Paying off credit cards with other credit cards.
Granted sometimes a new credit card company might offer a good deal that may make it worthwhile to transfer your credit card debt, however making a habit out of it is going at the very least screw with your credit rating and at the worst push you into further debt.

Getting the wrong debt consolidation loan.
Debt consolidation loans can be a great way of lowering interest rates and making debts manageable or can be the worst financial mistake you ever made. Many are tempted to borrow even more when they get into a debt consolidation loan increasing the problem instead of consolidating it. Also, many of these loans are linked to your home mortgage and have high interest rates. If you use a debt consolidation loan to pay off your credit card and car loan debts and it is linked to your home or mortgage you could lose your home, something that would not happen with credit cards.

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Paying off the loan is the hard part. Getting your car title is easier than you may think.